A British bank potentially backed with public money will be created to shake up the market in business finance, Vince Cable will announce on Tuesday in a major speech setting out a new industrial strategy.

The business secretary said the government had a role as a catalyst in areas where the lending market "doesn't work well".

He told BBC Radio 4's Today programme that there may well be government money behind it but the scale and scope was something he was still discussing with the chancellor, George Osborne.

Outlining an institution that could promote lending to companies that struggled to get long-term loans, Cable said he was working with Osborne on "how big it should be, how it should operate, and what the sectors it services should be".

"We do recognise that there are areas where the current financial services market, the banking market, just isn't working for chunks of the British economy. Small business lending is actually contracting; we know the serious problems in the banking sector, and there are certain areas where the market has failed and we do think an intervention would help."

Cable will stress in his speech at Imperial College, London, that "the measure of the institution's success will not be the scale of its own direct interventions, but how far it shakes up the market in business finance and helps to ease constraints for high-growth firms".

"There is a real shortage of long-term 'patient' capital for businesses. Try and secure a loan for more than five years of venture capital and options are very limited especially for innovative, high-growth potential firms."

His remarks suggest that the bank is initially likely to be focused on small businesses but will do more than merely collate the government's existing funding initiatives.

In his speech, Cable suggests the bank could operate through alternative providers such as Handelsbanken, the Swedish bank operating successfully in the UK, the Co-op and Aldermore, a bank dedicated to help small and medium-sized firms.

Cable notes that the latest official statistics show that in the last 12 months 33% of firms that applied for a loan were rejected. By contrast, he argues, "big firms by and large are able to raise short- and long-term finance via capital and equity markets. Many successful smaller companies finance themselves through cashflow."

He says: "The big banks including the big state-owned banks are preoccupied with repairing damaged balanced sheets."

The left has long argued that Britain should look to Germany for ways to provide finance to industry, and overcome shortages of capital. Germany has both a state investment bank, the Kreditanstalt für Wiederaufbau ("KfW"), and Sparkassen, which would describe themselves as regional retail banks or possibly municipal mutualised banks.

Support for a "British business bank" has been growing among businesses, which are increasingly exasperated by the failure of banks to deliver funding on acceptable terms.

In a new paper, John Longworth, the director general of the British Chambers of Commerce, argued: "The case for a business bank grows clearer with each passing day. Although many companies say their order books are full and they need financing in order to fulfil customers' requests, the overall stock of lending to small- and medium-sized firms continues to shrink.

"Companies that are less than five years old, often at the point of a major growth spurt, are more likely to have loan applications declined. Independent inquiries show there is real 'discouraged demand' among businesses who are keen to expand, but too scared to even approach the bank for help."

On the Today programme, Cable set out the government's strategy for "getting behind our success stories", saying "pure laissez-faire" economics did not work and that intervention was needed to support British business where the market had failed.

"We have sectors of the economy, aerospace is a good example, where Britain's probably the second country in the world, the automobile sector, where we've done extraordinarily well, an enormous amount of investment over the last couple of years, life sciences is another.

"We do feel that although it's not the job of the government to direct industries – it's got to be private sector led – there is a role for government in supporting long-term investment in research, in using procurement in a more strategic way, in supporting skills. Government has a role. Pure laissez-faire is not the right way of doing things. Very few countries would dream of approaching their industry in that way. We do believe in getting behind our success stories."

Cable also stressed the benefits of more strategic public procurement and said it was fair to suggest that other European countries had managed EU rules better.

"We've been a bit too defensive about the European Union rules. We don't want to become protectionist and nationalist in the way we buy things but we think we could do a lot more to promote British business through procurement."